Answer to Question #218409 in Microeconomics for abhi

Question

Suppose the majority of the residents of Birraland live close to the border and have access to beer at a lower price either in another province or in a neighboring country. What do you expect to occur? What does this imply about the ability of the local government of Birraland to independently set their beer pricing policy? Which jurisdiction is likely to be more problematic, other provinces or the neighboring country?

Answer 1

Suppose the majority of the residents of Birraland live close to the border and have access to beer at a lower price, either in another province or in a neighboring country.

In the given situation, it is expected that if the price of the beer produced locally is higher, than the demand for it will be significantly less because the residents have the option for the cheaper one. This means that the price elasticity of demand for local beer will be higher, i.e., more elastic.

This elastic demand for the local beer decreases the ability of the local government of Birraland to set their beer pricing policy independently. This is because since the demand is elastic, the producers or government will have less control over the price, and consumers will have higher power. Thus if the government tries to increase the price or put a tax on beer, the demand will fall sharply, and hence both producers' revenue/profit and government tax revenue will fall.

The jurisdiction of the neighboring country is likely to be more problematic, because if there is a problem between the provinces within the country, it can be solved with the intervention of the National government or a two-party talk. But if there is a problem between countries, it is challenging to control because even if they formally ban imports, people living along the border may get it illegally.